Pages

Monday, May 4, 2015

Govt includes subsides under income in Fin Bill amendment

It’s turning out to be a summer of tax discontent. The Finance Bill 2015, as passed by the Lok Sabha last week includes a surprise amendment, one that was not in the Finance Bill tabled earlier. The government has decided to tax all central and state subsidies and grants.

The definition of income has been amended to include any subsidy, grant, waiver, cash incentive or similar assistance. This has been a vexed issue for long. And there have been judgments that determine whether a subsidy is a revenue or capital receipt.

For instance, a sales tax subsidy to encourage new capital investment is a capital receipt and not liable to tax, whereas revenue subsidies are. Now this amendment brings both capital and revenue subsidies to tax. It’s counterintuitive – a subsidy is an incentive, and taxing it reduces its full benefit!

Dinesh Kanabar, Founder & CEO, Dhruva Advisors says, “So what we are now saying is on the one hand the government is giving you 100 and taking away 35 by way of taxes. There is actually a SC judgment in the case of Ponni Sugars & Chemicals where the SC held that any subsidy has to be regarded in the light of the scheme for which it was received. And it went on to say that take for example if the purpose of the government was to develop a backward area, a state, to promote any industry etc, then all such grants are capital in nature and not liable to tax. What this amendment seems to do is to nullify a host of judgments, the Bombay High Court in the case of Reliance has held that any sales tax subsidy received in not capital in nature and not liable to tax etc.”

Experts say this will undoubtedly have a material impact on a large number of companies in India.

Kanabar adds, “A number of assesses will get impacted. In Maharashtra there was a scheme for dev of multiplexes and any such subsidy received for multiplexes is not liable to tax because it was a capital receipt those would now be liable to tax. Similarly sales tax subsidy is being granted by all the states to promote capital investments and the subsidies range from between 50-100 percent of the capital investment made. All such subsidies will now be liable to tax as income. And this entire program of Make In India which requires industrialisation will now be impacted as a result of this amendment.

Besides the oddity that an incentive is being sought to be taxed, that it was quietly introduced in the Finance Bill and passed without debate has also disturbed tax experts.